Statements of Position



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Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards No. 60, Accounting and Reporting by Insurance Enterprises, provides guidance to insurance enterprises on how to determine whether reinsurance contracts provide for indemnification against loss or liability and on how to account for such contracts. In applying this guidance, each insurance enterprise has to interpret the expression "indemnification . . . against loss or liability," which could be interpreted differently for similar contracts. This proposed statement of position (SOP) provides guidance for assessing risk transfer in property and liability reinsurance contracts. It discusses the various kinds of risks involved, such as insurance risk (which has two components—uncertainties about the ultimate amount of any claim payments [underwriting risk] and uncertainties about the timing of those payments [timing risk]), investment-yield risk, credit risk, and expense risk. The proposed SOP concludes that a contract should be accounted for as providing reinsurance if the ceding company's insurance risk (both underwriting and timing) has been transferred to the assuming company. A ceding company's insurance risk has been transferred when all the following conditions have been satisfied: 1. The terms of the contract, for a fixed or reasonably determinable cost, provide for the reinsurer to assume a specified level or percentage of the ceding company's claims incurred or exposure to claim occurrences. 2. The terms of the contract, including any adjustable features, do not allow the ultimate underwriting margin or deficit under the contract to be determinable in advance. Therefore, after application of any adjustable features contained in the contract, there should still be a reasonable degree of potential variability in the ultimate underwriting results under the contract in relation to the total consideration paid. (For purposes of applying this condition to contracts that provide for adjustments based on actual or imputed investment earnings, such adjustments should be considered, as appropriate, in determining whether the underwriting margin or deficit under the contract is determinable in advance.) 3. The terms of the contract provide for the timely reimbursement of covered losses by the reinsurer. Provisions that delay reimbursement to the ceding company, such as predetermined payment schedules, do not provide for the timely reimbursement of covered losses. Reinsurance contracts that do not transfer both components of insurance risk must be accounted for as deposits under the provisions of paragraph 40 of FASB Statement No. 60. The proposed SOP provides guidance on accounting for reinsurance contracts and the disclosures that should be made.

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Reinsurance -- United States -- Auditing; Reinsurance -- Accounting; Risk assessment -- United States -- Auditing; Risk assessment -- United States -- Accounting; Insurance, Property -- United States -- Auditing; Insurance, Property -- United States -- Accounting; Insurance, Liability -- United States -- Auditing; Insurance, Liability -- United States -- Accounting


Accounting | Taxation


Originally published by: American Institute of Certified Public Accountants; Copyright and permission to reprint held by: American Institute of Certified Public Accountants.

Proposed statement of position : guidance for assessing risk transfer in property and liability reinsurance contracts;Guidance for assessing risk transfer in property and liability reinsurance contracts; Exposure draft (American Institute of Certified Public Accountants), 1991, Sept. 10



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